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Central Bank Digital Currencies: A Comprehensive Analysis of Global Developments, Models, Benefits, and Challenges

Many thanks to our sponsor Panxora who helped us prepare this research report.

Abstract

Central Bank Digital Currencies (CBDCs) represent a monumental shift in the global monetary landscape, offering central banks an unprecedented opportunity to redefine and modernize national payment systems, foster greater financial inclusion, and reinforce monetary sovereignty in an increasingly digital world. This extensive research report undertakes an exhaustive analysis of CBDCs, meticulously distinguishing them from private decentralized cryptocurrencies and stablecoins, and dissecting their various architectural models, primarily retail and wholesale implementations. It delves deeply into the multifaceted potential benefits, encompassing enhanced payment efficiency, a significant uplift in financial inclusion, and the provision of more sophisticated tools for monetary policy transmission and data-driven insights. Crucially, the report critically evaluates the inherent challenges, including profound privacy implications, complex cybersecurity vulnerabilities, the potential for systemic financial disintermediation impacting commercial banks, and the broader macroeconomic ramifications. Furthermore, it provides an expansive survey of the global impetus towards CBDC development and pilot programs, examining the diverse approaches adopted by leading central banks worldwide, with a particular emphasis on the proactive initiatives and planned real-world transaction experiments for retail CBDCs in South Korea.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

The digital revolution has profoundly reshaped nearly every facet of human interaction, and the financial sector stands at the precipice of its most transformative phase yet. The emergence of digital currencies, from privately issued cryptocurrencies to stablecoins, has posed significant questions for traditional fiat money systems, compelling central banks globally to seriously contemplate and actively pursue the issuance of their own Central Bank Digital Currencies (CBDCs). Unlike the nascent, often volatile, and fundamentally decentralized cryptocurrencies such as Bitcoin, or stablecoins pegged to fiat but issued by private entities, CBDCs are fundamentally a sovereign undertaking. They are digital forms of a nation’s existing fiat currency, issued, backed, and regulated by its central bank, carrying the full faith and credit of the state. This report endeavours to provide an exhaustive and nuanced examination of CBDCs, traversing their conceptual foundations, architectural models, potential advantages, significant challenges, and the dynamic global landscape of their development. Special attention is dedicated to South Korea’s forward-thinking and comprehensive approach, showcasing a nation at the forefront of this digital monetary evolution.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Conceptual Framework of CBDCs

To fully appreciate the implications of CBDCs, it is imperative to establish a clear conceptual framework, delineating their core characteristics and distinguishing them from other forms of digital money.

2.1 Definition and Core Characteristics

A Central Bank Digital Currency (CBDC) can be formally defined as a digital liability of a central bank, denominated in the national unit of account, that serves as a medium of exchange. It is essentially a digital representation of a country’s fiat currency, issued and controlled by the central bank, much like physical banknotes or coins. However, unlike physical cash, which is a bearer instrument, a CBDC is an entry in a digital ledger. Unlike commercial bank deposits, which are liabilities of private commercial banks, a CBDC is a direct liability of the central bank, carrying no credit or liquidity risk beyond the sovereign risk of the issuing state.

Key characteristics of CBDCs include:

Central Bank Liability: This is the defining feature. A CBDC is a claim on the central bank, making it the safest form of money available in the digital realm, akin to holding physical cash.
Legal Tender Status: Typically, a CBDC would be designated as legal tender, meaning it must be accepted as a valid form of payment for all debts, public and private, within the issuing jurisdiction.
Denominated in National Currency: CBDCs are denominated in the existing national unit of account (e.g., dollars, euros, won), ensuring direct parity with physical cash and commercial bank deposits.
Digital Form: They exist purely in digital format, facilitating electronic transactions and potentially offering programmability features.
Complementary Nature: CBDCs are generally envisioned to complement, rather than entirely replace, existing forms of money (physical cash and commercial bank deposits), offering an additional payment option.
Universally Accessible (for retail CBDCs): Designed to be accessible to a wide range of users, including individuals and businesses, potentially expanding financial inclusion.
Zero or Low Risk: As a direct liability of the central bank, CBDCs are inherently devoid of credit risk and liquidity risk, providing a bedrock of stability in the digital financial ecosystem.

2.2 Differentiation from Decentralized Cryptocurrencies and Stablecoins

The proliferation of digital assets necessitates a clear differentiation between CBDCs and other prominent forms of digital money, notably decentralized cryptocurrencies and stablecoins.

2.2.1 Decentralized Cryptocurrencies (e.g., Bitcoin, Ethereum)

Decentralized cryptocurrencies operate on a fundamentally different paradigm. They are characterized by:

Decentralized Control: There is no central authority (like a central bank) governing their issuance, transaction validation, or monetary policy. Instead, control is distributed across a network of participants.
Distributed Ledger Technology (DLT): They typically rely on blockchain technology, a form of DLT, where transactions are recorded on an immutable, distributed public ledger.
Consensus Mechanisms: Transactions are verified and added to the blockchain through various consensus mechanisms (e.g., Proof of Work in Bitcoin, Proof of Stake in Ethereum 2.0), rather than a centralized authority.
Volatile Valuation: Their value is primarily driven by market supply and demand, speculative trading, and network adoption, leading to significant price volatility. This makes them unsuitable as stable stores of value or reliable units of account for everyday transactions.
Limited Monetary Policy Control: Central banks have no direct means to influence their supply or value, making them incompatible with traditional monetary policy objectives.
Pseudonymity (often): While transactions are public on the ledger, the identities of participants are often pseudonymous, linked to cryptographic addresses rather than real-world identities, though enhanced analytics can sometimes de-anonymize.

In stark contrast, CBDCs are centralized, directly controlled by the central bank, stable in value (pegged to the national fiat currency), and subject to the full suite of monetary policy tools. They are designed to integrate seamlessly into existing financial and regulatory frameworks, emphasizing stability, efficiency, and compliance.

2.2.2 Stablecoins (e.g., Tether, USDC)

Stablecoins represent an intermediary category, attempting to bridge the volatility of cryptocurrencies with the stability of fiat currencies. They aim to maintain a stable value relative to a specific fiat currency (e.g., USD) or a basket of assets.

Private Issuance: Stablecoins are issued by private entities, not central banks or government authorities. Their stability relies on the credibility and transparency of the issuer’s reserve management.
Pegging Mechanism: They achieve stability by being backed by reserves (e.g., fiat currency, government bonds, commercial paper) held by the issuer, or through algorithmic mechanisms.
Regulatory Uncertainty: The regulatory landscape for stablecoins is still evolving, and their classification (e.g., as securities, commodities, or payment instruments) varies across jurisdictions. Concerns exist regarding the quality and liquidity of their reserves, and the potential for runs.

While stablecoins offer a degree of stability not found in volatile cryptocurrencies, they introduce counterparty risk associated with the private issuer. If the issuer’s reserves are insufficient or mismanaged, the peg can break, leading to losses. CBDCs, as liabilities of the central bank, inherently carry no such private credit risk, providing a higher degree of safety and reliability for users.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Models of CBDCs

CBDCs are broadly conceptualized into two primary models, distinguished by their intended user base and typical transactional scale: retail CBDCs and wholesale CBDCs. Within the retail category, further architectural choices dictate the extent of central bank involvement.

3.1 Retail CBDCs (General Purpose CBDCs)

Retail CBDCs are designed for use by the general public – individuals and businesses – for everyday transactions, much like physical cash or commercial bank deposits. Their primary objectives often revolve around enhancing payment efficiency, fostering financial inclusion, and providing a risk-free digital alternative to cash. There are several architectural models for retail CBDCs, each with distinct implications for the central bank’s role, privacy, and the commercial banking sector:

3.1.1 Direct CBDC (Single-Tiered Model)

In a direct CBDC model, the central bank would directly manage all accounts and process all transactions for end-users. This model implies a significant expansion of the central bank’s operational scope, traditionally focused on interbank relations and monetary policy. Users would hold accounts directly with the central bank. While this offers the highest degree of security and eliminates commercial bank credit risk for users, it poses several challenges:

Operational Burden: The central bank would need to handle millions or billions of retail accounts, customer onboarding (KYC/AML), customer service, and transaction processing, a massive operational undertaking traditionally handled by commercial banks.
Privacy Concerns: Central bank direct access to all transaction data could raise significant privacy concerns among the public, despite assurances of data anonymization or aggregation.
Disintermediation Risk: This model poses the most significant threat of disintermediation to commercial banks, as deposits could flow directly from commercial banks to the central bank, potentially reducing their funding base for lending.

Given these challenges, a pure direct CBDC model is generally considered less feasible or desirable by most central banks.

3.1.2 Indirect CBDC (Two-Tiered or Intermediated Model)

The indirect or intermediated model is the most widely favoured approach globally. In this structure, the central bank issues the CBDC to commercial banks and other regulated payment service providers (PSPs), who then distribute it to the public and manage customer-facing services. This mirrors the existing financial system where commercial banks offer deposit accounts and payment services based on central bank money (reserves).

Key features of this model:

Central Bank as Issuer: The central bank remains the sole issuer of the CBDC, maintaining its status as a direct liability.
Commercial Banks/PSPs as Intermediaries: Commercial banks and other licensed financial institutions act as intermediaries, managing customer accounts (wallets), conducting KYC/AML checks, providing payment services, and handling customer support. They effectively provide the ‘front-end’ services.
Leveraging Existing Infrastructure: This model leverages the existing financial infrastructure and expertise of commercial banks, minimizing the operational burden on the central bank.
Mitigated Disintermediation: While still a concern, measures can be implemented to mitigate disintermediation, such as setting limits on CBDC holdings or tiering interest rates.
Privacy: User transaction data is primarily held by the intermediaries, offering a potential layer of privacy from the central bank, subject to regulatory frameworks.

Most countries currently exploring or piloting retail CBDCs, including China (e-CNY), India (e₹), and the EU (Digital Euro), are leaning towards or explicitly adopting variations of this two-tiered model. For instance, the People’s Bank of China’s e-CNY system involves designated operating institutions (large commercial banks) that handle the issuance and circulation of the digital yuan to end-users.

3.1.3 Hybrid Models

Some proposals suggest hybrid models that combine elements of direct and indirect approaches. For example, the central bank might maintain a ‘wholesale ledger’ for intermediaries, while retail transactions are processed by intermediaries on a ‘retail ledger’, with periodic reconciliation. Another hybrid approach could involve the central bank directly managing a core ledger for all CBDC transactions but allowing intermediaries to build innovative payment services on top of it, providing the user interface and customer relationship management.

3.2 Wholesale CBDCs

Wholesale CBDCs are digital currencies restricted for use by financial institutions (commercial banks, investment firms, clearing houses) for large-value transactions and interbank settlements. They are generally not intended for public use.

Their primary objectives are to enhance the efficiency, security, and resilience of financial markets by:

Improving Interbank Settlements: Facilitating real-time gross settlement (RTGS) of interbank payments, reducing settlement risk (e.g., Herstatt risk in foreign exchange transactions) and improving liquidity management.
Enhancing Securities Settlement: Enabling atomic delivery-versus-payment (DvP) and payment-versus-payment (PvP) in securities transactions, where the transfer of assets and funds occurs simultaneously on a DLT platform. This eliminates counterparty risk and greatly speeds up settlement cycles (from T+2 to T+0).
Cross-Border Payments: Potentially streamlining complex cross-border payment chains, reducing costs, settlement times, and foreign exchange risks by enabling multiple CBDCs to interact on shared platforms (e.g., multi-CBDC platforms).
Tokenized Assets: Facilitating the settlement of tokenized securities, commodities, and other assets on DLT platforms, unlocking new opportunities for financial innovation.

Projects like Project Jasper in Canada, Project Ubin in Singapore, and the European Central Bank’s exploration of wholesale digital euro applications are examples of initiatives focused on improving the efficiency of institutional payment systems and the settlement of financial assets using DLT-based wholesale CBDCs. These projects often explore the use of DLT to enable smart contracts that automate complex financial processes, further enhancing efficiency and reducing operational risk.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Potential Benefits of CBDCs

The rationale for exploring and implementing CBDCs is underpinned by a compelling array of potential benefits, addressing various shortcomings of existing payment systems and opening new avenues for financial policy.

4.1 Payment Efficiency and Innovation

CBDCs have the potential to significantly streamline payment processes by reducing transaction times and costs. By operating on modern digital infrastructure, they can facilitate near real-time settlement, eliminating layers of intermediaries often involved in traditional payment systems. This reduction in intermediation can lead to lower transaction fees for consumers and businesses.

Real-Time Gross Settlement (RTGS): Many central banks aim for RTGS capabilities with CBDCs, meaning payments are settled instantly and irrevocably, reducing settlement risk and improving liquidity management for financial institutions. This is particularly relevant for wholesale CBDCs.
Reduced Friction and Costs: For retail CBDCs, the digital nature can reduce the operational costs associated with handling physical cash (printing, transport, security) and potentially lower transaction fees for digital payments, especially for small-value transactions that are often disproportionately expensive through traditional channels.
Enhanced Cross-Border Payments: One of the most significant potential benefits lies in cross-border transactions. Current international payments are often slow, expensive, and opaque due to multiple intermediaries, differing regulatory environments, and time zone differences. Interoperable CBDCs or multi-CBDC platforms could facilitate seamless, faster, and cheaper cross-border payments by enabling direct peer-to-peer transfers between jurisdictions or through synchronized settlement mechanisms. Initiatives like Project Dunbar (BIS Innovation Hub) aim to explore such possibilities.
Programmability: CBDCs could be ‘programmable’ money, enabling smart contracts that automatically execute payments based on predefined conditions. This could revolutionise supply chain finance (e.g., payment on delivery), government disbursements (e.g., automated welfare payments upon eligibility), and enable innovative financial products.

4.2 Financial Inclusion

Financial inclusion remains a critical global challenge, with billions worldwide lacking access to basic financial services. CBDCs offer a powerful tool to address this.

Access for the Unbanked: CBDCs can provide a secure, low-cost digital payment method for populations without traditional bank accounts. For individuals primarily using cash, a CBDC wallet accessible via a basic mobile phone could open doors to the digital economy, enabling them to send/receive payments, save digitally, and access other digital financial services.
Lower Barrier to Entry: Unlike traditional bank accounts that often require minimum balances or incur maintenance fees, a CBDC account could be designed to be free or very low-cost, making it accessible to low-income individuals.
Offline Functionality: Some CBDC designs propose offline capabilities, allowing transactions in areas with limited or no internet connectivity, mirroring the resilience of physical cash. This is particularly relevant for disaster relief or remote regions.
Reduced Transaction Costs: For marginalized communities, traditional remittance services or small-value payments can be prohibitively expensive. CBDCs could significantly lower these costs, allowing more money to reach beneficiaries.
Government Disbursements: CBDCs can facilitate efficient and transparent government-to-person payments (e.g., welfare benefits, emergency relief), ensuring funds reach recipients directly and reducing administrative overhead and potential for corruption. Nigeria’s eNaira, launched in 2021, explicitly aimed to boost financial inclusion, particularly targeting its significant unbanked population.

4.3 Enhanced Monetary Policy Tools

CBDCs offer central banks refined and potentially more direct mechanisms for implementing monetary policy and gaining richer insights into economic activity.

Direct Transmission: In a crisis, a central bank could directly disburse funds (helicopter money) to citizens’ CBDC wallets, potentially accelerating fiscal stimulus. Similarly, interest rate changes could be directly reflected in interest paid on CBDC holdings (if CBDCs are interest-bearing), ensuring more immediate and uniform transmission across the economy.
Tiered Interest Rates: Central banks could implement tiered interest rates on CBDC holdings, potentially encouraging spending by applying negative rates beyond a certain threshold or discouraging large hoardings to protect commercial bank deposits.
Granular Data and Insights: While respecting privacy, aggregated and anonymized transaction data from CBDC usage could provide central banks with real-time, granular insights into economic activity, consumption patterns, and financial flows. This data, if carefully managed, could significantly enhance the central bank’s ability to monitor economic conditions and formulate more precise and effective policy responses.
Crisis Management: During periods of financial instability, a CBDC could serve as a safe haven, offering a risk-free digital alternative to commercial bank deposits, potentially mitigating the risk of bank runs or providing a stable anchor. However, this also presents a challenge, as discussed later.

4.4 Fostering Financial Innovation and Competition

By providing a foundational digital currency, CBDCs can spur innovation in the private sector. Regulated private entities can build new payment solutions, financial products, and services on top of the CBDC infrastructure, fostering competition and efficiency in the payment ecosystem.

Platform for Innovation: A CBDC can serve as a common, interoperable platform for new payment services, financial applications (FinTech), and tokenized asset markets, encouraging private sector participation.
Reduced Barriers to Entry: By standardizing the digital base money, smaller FinTech firms might find it easier to enter the payment market without needing to build extensive proprietary infrastructure or secure complex banking relationships.
Competition in Payment Services: Increased competition among payment service providers using CBDCs could drive down costs and improve service quality for consumers and businesses.

4.5 Maintaining Monetary Sovereignty and Financial Stability

In an era where privately issued digital currencies and foreign digital currencies (e.g., foreign stablecoins) could gain significant traction, CBDCs enable central banks to maintain control over their domestic monetary system.

Countering Private Digital Currency Dominance: A well-designed CBDC can offer a credible, risk-free alternative to private digital monies, preventing widespread adoption of potentially volatile or unregulated private currencies that could undermine national monetary policy and financial stability.
Reinforcing the Role of National Currency: In a world where cash usage is declining, a CBDC ensures that the national currency remains relevant and widely used in digital transactions, reinforcing the central bank’s authority and safeguarding its ability to manage the economy.
Strengthening Financial Stability Frameworks: By providing a safer digital payment alternative and potentially a robust backbone for financial market infrastructure, CBDCs could strengthen overall financial stability, particularly in a crisis.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Challenges Associated with CBDCs

While the potential benefits of CBDCs are significant, their implementation is fraught with complex challenges that necessitate careful design, robust safeguards, and comprehensive regulatory frameworks.

5.1 Privacy Concerns

The digital nature of CBDCs and the potential for traceability raise profound concerns regarding individual privacy.

Traceability and Surveillance: Unlike physical cash, which offers true anonymity, digital transactions inherently leave a data trail. A CBDC system could potentially allow the central bank, or government entities, to monitor all transactions, raising fears of pervasive surveillance and data misuse. This tension between transparency (useful for combating illicit activities like money laundering and terrorism financing) and individual privacy is a central dilemma in CBDC design.
Data Security and Misuse: Even if central banks pledge to protect privacy, the sheer volume of transaction data collected could become a tempting target for cybercriminals or state actors. The potential for data breaches, identity theft, or the misuse of personal financial information for profiling or discrimination is a significant concern.
Design Considerations: Addressing privacy requires careful architectural choices. Solutions might include pseudonymity (where identities are not directly linked to transactions but can be revealed under specific legal circumstances), zero-knowledge proofs (allowing verification without revealing underlying data), or tiered access to information. Some models propose that intermediaries hold most of the customer data, with the central bank only having access to aggregated, anonymized, or essential transactional data for monetary policy purposes, similar to current commercial banking practices. The European Central Bank’s investigation phase for the digital euro places a high emphasis on privacy, aiming for a level of privacy comparable to current digital payments, if not better.

5.2 Cybersecurity Risks

As a critical national infrastructure, a CBDC system would be a prime target for sophisticated cyberattacks, posing significant cybersecurity risks.

System Integrity: A CBDC system would need to withstand attempts at hacking, denial-of-service attacks, and data manipulation to ensure the integrity of the currency and transactions. Any breach could erode public trust and destabilize the financial system.
Data Breaches: Theft of personal financial data or CBDC holdings through cyberattacks could lead to widespread financial losses and reputational damage.
Single Point of Failure: Depending on its architecture, a highly centralized CBDC system could present a single, high-value target for cyber warfare or criminal enterprises. Robust redundancy, distributed ledger technology where appropriate, and advanced encryption techniques are vital.
Quantum Computing Threat: The advent of quantum computing poses a long-term threat to current cryptographic standards. CBDC systems must be designed with ‘quantum resistance’ in mind or have clear pathways for future upgrades to ensure long-term security.
Operational Resilience: Beyond malicious attacks, the system must be resilient to outages, technical glitches, and natural disasters, ensuring continuous availability of payments.

5.3 Impact on Commercial Banks

The introduction of CBDCs, particularly retail CBDCs, could significantly alter the traditional banking landscape, potentially leading to disintermediation.

Deposit Flight and Disintermediation: If a CBDC is seen as a safe, risk-free alternative to commercial bank deposits, especially during times of financial stress, there could be a mass migration of funds from commercial bank accounts to CBDC holdings. This ‘deposit flight’ would reduce commercial banks’ stable funding base, potentially impairing their ability to extend credit to the economy and impacting their profitability.
Changed Lending Capacity: A reduced deposit base would constrain banks’ lending capacity, potentially leading to higher lending rates and a contraction in credit, which could harm economic growth.
Redefining Bank’s Role: Commercial banks might need to redefine their business models. While they could become primary distributors and service providers for CBDCs, their traditional role as deposit-taking and lending institutions could diminish. They may need to shift focus towards fee-based services, wealth management, or more sophisticated lending.
Liquidity Management: Banks would need to adapt their liquidity management strategies to account for potential fluctuations in CBDC holdings and their impact on reserves.
Mitigation Strategies: Central banks are exploring various mitigation strategies, such as setting limits on individual CBDC holdings (e.g., a cap of a few thousand dollars), implementing tiered remuneration for CBDCs (e.g., zero interest or even negative interest above a certain threshold to discourage large holdings), or designing the CBDC to be non-interest-bearing, thereby preserving the competitive advantage of commercial bank deposits.

5.4 Financial Stability Risks

While CBDCs can enhance financial stability in some aspects, they also introduce new risks.

Bank Runs: As mentioned, in times of crisis, the availability of a risk-free CBDC could accelerate and intensify bank runs, as depositors could instantly convert commercial bank deposits into CBDC, exacerbating liquidity crises for banks.
Systemic Risk: A failure or disruption of the CBDC system itself could have catastrophic systemic consequences for the entire financial system and economy, given its potential centrality to payments.
Monetary Policy Implementation Challenges: While offering new tools, CBDCs also complicate monetary policy. If large amounts of cash shift to CBDC, the central bank’s balance sheet would expand significantly, potentially raising questions about its role and independence. Managing the precise impact on the money supply and credit creation will require careful calibration.

5.5 Implementation Costs and Technical Feasibility

Developing and deploying a robust, scalable, and secure CBDC system is a monumental technical and financial undertaking.

Infrastructure Development: This involves building new digital infrastructure, potentially involving DLT or centralized systems, to issue, distribute, and settle CBDC transactions. This requires significant investment in hardware, software, and skilled personnel.
Scalability: A national retail CBDC system would need to process millions, if not billions, of transactions daily, requiring immense scalability, speed, and resilience, far exceeding most existing DLT systems’ current capabilities.
Interoperability: Ensuring interoperability with existing payment systems (e.g., ATMs, POS terminals, online payment gateways) and future financial innovations is crucial for seamless adoption.
Cybersecurity Investment: Continuous and substantial investment in cybersecurity measures, threat intelligence, and incident response capabilities will be necessary.
Energy Consumption: If a DLT-based CBDC were to adopt energy-intensive consensus mechanisms, environmental concerns could arise.

5.6 Legal and Regulatory Frameworks

The introduction of a CBDC necessitates significant changes and clarifications in legal and regulatory frameworks.

Legal Tender Status: Laws would need to be updated to confer legal tender status on the digital currency.
Data Protection and Privacy Laws: Comprehensive data protection and privacy laws specific to CBDC data would be essential to address public concerns.
AML/CFT Compliance: Robust Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) frameworks would need to be integrated into the CBDC system, ensuring compliance without unduly impeding legitimate transactions or privacy.
International Coordination: For cross-border CBDC payments, international legal and regulatory harmonisation would be crucial to ensure seamless operation, resolve jurisdictional issues, and prevent regulatory arbitrage.

5.7 Public Acceptance and Education

Ultimately, the success of a CBDC hinges on public trust and adoption. This is not guaranteed.

Digital Literacy: A significant portion of the population, particularly the elderly or those in less developed regions, may lack the digital literacy or access to technology required to use CBDCs effectively.
Trust and Skepticism: Overcoming public skepticism about central bank involvement in individual finances, fears of surveillance, and concerns about potential disintermediation of familiar commercial banks will require extensive public education campaigns and transparent communication.
Usability: The CBDC system must be user-friendly, reliable, and offer clear advantages over existing payment methods to encourage widespread adoption.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Global Landscape of CBDC Development

The global pursuit of CBDCs is characterized by a diverse range of motivations, technological approaches, and stages of development. As of early 2024, over 130 countries are exploring CBDCs, with some having launched pilot programs and a few even fully implementing them (Atlantic Council, 2024). This section provides an in-depth look at key initiatives worldwide.

6.1 China: The Digital Yuan (e-CNY)

China stands as a global frontrunner in retail CBDC implementation. The People’s Bank of China (PBOC) began its journey with the Digital Currency Electronic Payment (DCEP) project, now known as the e-CNY, as early as 2014. Large-scale pilot testing commenced in 2019, making it one of the most extensive and long-running retail CBDC pilots globally.

Motivation: China’s motivations for the e-CNY are multi-faceted: enhancing payment efficiency in a highly digitalised society, promoting financial inclusion, improving monetary policy tools, and crucially, maintaining monetary sovereignty in the face of dominant private payment platforms (Alipay, WeChat Pay) and potential foreign digital currencies. Geopolitically, it is also seen as a tool to internationalise the RMB and circumvent the dollar-dominated global financial system.
Architecture: The e-CNY operates on a two-tiered system. The PBOC issues the e-CNY to designated commercial banks (first tier), who then distribute it to individuals and businesses (second tier) through digital wallets. This leverages existing banking infrastructure while maintaining central bank control.
Progress and Scale: The e-CNY pilot has expanded rapidly across numerous cities and provinces. As of June 2024, reports indicated total transaction volumes exceeding 7 trillion e-CNY (approximately $960 billion USD), involving millions of users and merchants across 17 provincial regions. Use cases span daily consumer transactions, public transport, government subsidies, healthcare, education, and even cross-border payments in limited pilots (e.g., Project mBridge). The PBOC has also explored offline payment functionality, making it usable without internet connectivity.
Unique Features: The e-CNY emphasizes ‘controllable anonymity,’ allowing for anonymous small-value transactions while enabling traceability for large or suspicious transactions for anti-money laundering (AML) purposes. It is non-interest-bearing to avoid competing directly with commercial bank deposits.
Future Outlook: China continues to expand the pilot, integrating it into more sectors and exploring more complex programmable payment scenarios. While not fully rolled out nationwide, its extensive pilot signifies a strong commitment to integrating CBDCs into its core financial infrastructure.

6.2 European Union: The Digital Euro

The European Central Bank (ECB) and the European Commission have been diligently exploring the prospects of a digital euro, driven by the decline of cash, the rise of private digital payments, and the need to ensure the euro’s continued relevance and resilience in a digital age.

Motivation: Key objectives include preserving the role of central bank money, enhancing payment efficiency, strengthening European strategic autonomy in payments, fostering financial innovation, and ensuring broad access to central bank money in a digital form.
Investigation Phase (2021-2023): The ECB completed a two-year investigation phase in October 2023, analyzing design choices, distribution models, and potential impacts. This phase focused on user needs, privacy considerations, offline functionality, and the role of intermediaries.
Preparation Phase (Commenced October 2023): Following the investigation, the ECB decided to move into a ‘preparation phase’ expected to last two years. This phase will focus on finalizing the digital euro rulebook (detailing its functionalities, roles, and responsibilities) and selecting technology providers to develop the necessary platform and infrastructure. This is not a decision to issue, but to prepare for a potential future issuance.
Design Principles: The digital euro is envisioned as a retail CBDC, free for basic use, non-interest-bearing (or negligibly so) to protect financial stability, with robust privacy safeguards, and offline capabilities. It would operate on an intermediated model, with banks and payment service providers handling customer relationships.
Legal Framework: The European Commission proposed a legal framework for the digital euro in June 2023, outlining its legal tender status, privacy rules, and distribution mechanism.
Future Outlook: A decision on whether to actually issue the digital euro would only come after the preparation phase, potentially around 2026. Public and political acceptance remain crucial hurdles.

6.3 India: The Digital Rupee (e₹)

India, with its vast population and rapid digital payment adoption, has also embarked on a significant CBDC journey. The Reserve Bank of India (RBI) launched pilots for both wholesale and retail versions of its digital rupee (e₹).

Motivation: The RBI aims to enhance the efficiency of payment systems, reduce the cost of cash management, promote financial innovation, and reduce reliance on private digital payment platforms.
Wholesale Pilot (e₹-W): Launched in November 2022 for interbank borrowing, the e₹-W pilot demonstrated improved efficiency in the call money market, reducing settlement times and operational costs.
Retail Pilot (e₹-R): Also launched in November 2022, the e₹-R pilot involved select banks and cities, focusing on person-to-person (P2P) and person-to-merchant (P2M) transactions. The pilot has steadily expanded, with a growing user base and transaction volume. As of March 2025, the digital rupee in circulation reportedly rose to ₹10.16 billion ($122 million USD), marking a substantial increase from previous figures (Wikipedia, 2025).
Technology and Features: The e₹ uses distributed ledger technology. The RBI plans to expand its use cases, including offline functionality, programmability for specific government disbursements, and broader participation from various financial institutions.
Future Outlook: India is proceeding cautiously, learning from its pilot experiences before considering a full-scale rollout. The focus is on ensuring robustness, scalability, and broad adoption.

6.4 South Korea: The Digital Won

South Korea has emerged as a particularly active and innovative player in the CBDC space, driven by its highly digitalized economy and the rapid decline of cash usage. The Bank of Korea (BOK) has undertaken extensive research and pilot programs for a digital won.

Motivation: South Korea’s motivations include enhancing the efficiency and security of its payment system, adapting to the declining use of cash, preparing for a future digital economy, fostering financial innovation, and maintaining monetary sovereignty.
Pilot Program Phases: The BOK has adopted a multi-phase approach:
- Phase 1 (2021): Focused on basic functionality testing, including issuance, distribution, and redemption of a wholesale CBDC, simulated in a cloud-based test environment.
- Phase 2 (2022): Expanded to include retail CBDC simulations, testing features like offline payments, cross-border remittances, and the integration of smart contracts. The BOK simulated a two-tiered system involving commercial banks.
Real-World Transaction Experiments (Planned): A significant step forward is South Korea’s plan to implement real-world transaction experiments for its retail CBDC. These experiments are designed to test the practical usability, technical stability, and economic impact of the digital won in actual consumer scenarios. Collaborations with commercial banks and selected businesses are central to these trials, allowing the BOK to gather crucial feedback on user experience, transaction speeds, and system resilience in a live environment. This demonstrates a commitment to moving beyond theoretical simulations to practical application.
Focus Areas: Beyond general payments, the BOK is exploring specific applications, such as facilitating real-time cross-border payments with other jurisdictions also exploring CBDCs, and enabling new types of financial services that leverage the programmability of a digital currency.
Legal Framework: The BOK is actively reviewing and proposing necessary amendments to the legal framework, including the Bank of Korea Act, to provide a clear legal basis for the issuance and operation of a CBDC.
Future Outlook: South Korea’s methodical and proactive approach positions it among the leaders in CBDC readiness. The success of its real-world experiments will be pivotal in determining the path towards a broader rollout, potentially integrating the digital won seamlessly into the fabric of daily economic life.

6.5 United States: The Digital Dollar

The Federal Reserve has been exploring the implications of a digital dollar but has adopted a cautious and research-driven approach, emphasizing that no decision to issue a CBDC has been made.

Motivation: The Fed’s motivations include improving payment systems, reducing risks from private digital currencies, enhancing financial inclusion, and maintaining the international prominence of the dollar. However, it also emphasizes the need to avoid disintermediating commercial banks and ensure privacy.
Research and Public Consultation: The Federal Reserve released a discussion paper, ‘Money and Payments: The US Dollar in the Age of Digital Transformation,’ in January 2022, soliciting public feedback on the pros and cons of a digital dollar. It highlighted key policy considerations such as privacy, intermediation, financial stability, and international role.
Project Hamilton: The Federal Reserve Bank of Boston, in collaboration with MIT’s Digital Currency Initiative, completed Project Hamilton, a multi-phase research effort to build and test high-performance transaction processing systems for a hypothetical CBDC, demonstrating that a CBDC could handle massive transaction volumes.
Future Outlook: The US approach remains exploratory. Any decision to issue a digital dollar would require broad public and political consensus, likely including Congressional approval, and would need to clearly demonstrate benefits that outweigh the significant risks and costs.

6.6 United Kingdom: The Digital Pound

The Bank of England and HM Treasury are jointly exploring a potential digital pound, positioning it as a ‘digital form of cash’ to address the decline of physical cash and support a dynamic digital economy.

Motivation: To maintain public access to central bank money, support financial innovation, ensure resilience in payments, and prevent widespread adoption of private digital currencies.
Consultation and Blueprint: In February 2023, they published a consultation paper ‘The Digital Pound: A New Form of Money for Households and Businesses?’ along with a technology working paper. This outlined their proposed blueprint for a retail digital pound, emphasizing an intermediated model.
Design Principles: Key proposals include being privacy-preserving, non-interest-bearing (or at a very low rate), with limits on individual holdings to mitigate disintermediation, and operated on a two-tiered model with private sector innovation on top.
Future Outlook: The consultation closed in June 2023, and the Bank of England is currently analyzing feedback. A decision on whether to proceed to a build phase is expected in the mid-2020s, with potential implementation in the latter half of the decade if approved.

6.7 Other Notable Initiatives

Sweden (e-krona): As one of the earliest explorers, the Riksbank (Sweden’s central bank) has been piloting its e-krona since 2020, driven by Sweden’s rapid decline in cash usage. Their pilot has tested a DLT-based solution for retail payments, focusing on resilience and security.
Japan: The Bank of Japan began its CBDC pilot program in April 2021, focusing on technical feasibility and core functions (issuance, distribution, redemption). Phase 2, which began in 2022, is exploring more complex functions and collaborations with the private sector.
Ghana (eCedi): Ghana launched its eCedi pilot in September 2021, becoming one of the first African nations to actively test a retail CBDC, aiming to promote financial inclusion and digitize its economy.
Nigeria (eNaira): Launched in October 2021, the eNaira is Africa’s first fully operational retail CBDC. It aims to boost financial inclusion, facilitate remittances, and improve the efficiency of government payments, though adoption rates have varied.
BIS Innovation Hub Projects: The Bank for International Settlements (BIS) Innovation Hub has been instrumental in fostering international collaboration on CBDC research, particularly for wholesale and cross-border applications. Projects like ‘Project Dunbar’ (exploring multi-CBDC platforms for international settlements), ‘Project Mariana’ (testing cross-border foreign exchange trading and settlement using wholesale CBDCs), and ‘Project Icebreaker’ (examining cross-border payments between Norway, Sweden, and Israel using CBDCs) highlight the global focus on interoperability and efficiency.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Conclusion

Central Bank Digital Currencies represent a profound evolution in the financial sector, poised to fundamentally reshape the architecture of money and payments globally. They offer a compelling suite of potential benefits, including unprecedented improvements in payment efficiency, a significant leap towards greater financial inclusion for underserved populations, and the provision of more precise and powerful tools for monetary policy implementation. Furthermore, CBDCs present an opportunity for nations to reinforce their monetary sovereignty in an increasingly digital and interconnected world, providing a stable and reliable public good in the face of privately issued digital currencies.

However, the journey towards CBDC implementation is not without its formidable challenges. Navigating the intricate balance between transaction traceability and individual privacy, fortifying systems against sophisticated cybersecurity threats, and carefully managing the potential for disintermediation and systemic risks within the established commercial banking sector are paramount concerns that demand meticulous planning and robust mitigation strategies. The immense technical complexities and the necessity of establishing comprehensive legal and regulatory frameworks further underscore the magnitude of this undertaking.

Across the globe, central banks are adopting diverse approaches to CBDC development, each tailored to their unique economic contexts and policy objectives. From China’s extensive retail e-CNY pilot and India’s dual-pronged digital rupee initiatives to the European Union’s methodical investigation into the digital euro and the cautious research efforts in the United States, the landscape is dynamic and rapidly evolving. South Korea’s proactive stance, marked by its advanced pilot programs and ambitious plans for real-world retail CBDC transaction experiments, exemplifies the innovative and forward-looking spirit many nations are embracing to navigate the complexities of digital currency implementation.

As CBDCs continue their trajectory from theoretical concept to tangible reality, it is imperative for policymakers, central banks, financial institutions, private sector innovators, and the public to engage in sustained, collaborative dialogue. Addressing the inherent challenges with transparent governance, adaptive regulation, and continuous technological innovation will be key to harnessing the full transformative potential of digital currencies, ensuring they contribute to a more efficient, inclusive, and stable global financial ecosystem for future generations.

Many thanks to our sponsor Panxora who helped us prepare this research report.